The Next Subprime Crisis Is Here: Over $120 Billion In Federal Student Loans In Default

Whereas earlier today we presented one of the most exhaustive presentations on the state of the student debt bubble, one question that has always evaded greater scrutiny has been the very critical default rate for student borrowers: a number which few if any lenders and colleges openly disclose for fears the general public would comprehend not only the true extent of the student loan bubble, but that it has now burst. This is a question that we specifically posed a month ago when we asked "As HELOC delinquency rates hit a record, are student loans next?" Ironically in that same earlier post we showed a chart of default rates for federal loan borrowers that while rising was still not too troubling: as it turns out the reason why its was low is it was made using fudged data that drastically misrepresented the seriousness of the situation, dramatically undercutting the amount of bad debt in the system.

Luckily, this is a question that has now been answered, courtesy of the Department of Education, which today for the first time ever released official three-year, or much more thorough than the heretofore standard two-year benchmark, federal student loan cohort default rates. The number, for all colleges, stood at a stunning 13.4% for the 2009 cohort. The number is stunning because it is nearly 50% greater than the old benchmark, which tracked a two year default cohort, and which was a "mere" 8.8% for the 2009 year. Broken down by type of education, and using the new improved, and much more realistic benchmark, for-profit institutions had the highest average three-year default rates at 22.7 percent, with public institutions following at 11 percent and private non-profit institutions at 7.5 percent. In other words, more than one in five federal student loans used to fund private for-profit education, is now in default and will likely never be repaid!

And while it is impossible using historical data to extrapolate with precision what the current consolidated federal student loan default rate is, we do know that there is now $914 billion in federal student loans (which also was mysteriously revised over 50% higher by the Fed just a month ago). Using simple inference, all else equal (and all else has certainly deteriorated), there is now at least $122 billion in federal student loan defaults. And surging every day.

Ladies and gentlemen: meet the new subprime.

Another that quietly reported today on the change in the Department of Education's default tracking methodology was Bloomberg in "Student-Loan Default Rates Soar as Federal Scrutiny Grows." Needless to say, it was not impressed, because the new data indicated that there had been a concerted push by all sides to misrepresent the severity of the student debt problem, by over 50%. The "why" is quite simple:

The Education Department has revamped the way it reports student-loan defaults, which the government said had reached the highest level in 14 years. Previously, the agency reported the rate only for the first two years payments are required. Congress demanded a more comprehensive measure because of concern that colleges counsel students to defer payments to make default rates appear low.

“Default rates are the tip of the iceberg of borrower distress,” said Pauline Abernathy, vice president of The Institute for College Access & Success, a nonprofit based in Oakland, California.

On the stump, President Obama has touted an executive order that eases the process for applying for a loan program that lets students make lower payments tied to their income -- easing their burden and making it less likely they will default.

Under the new three-year measure, colleges with default rates of 30 percent or more for three consecutive years risk losing eligibility for federal financial aid. Schools can also be barred from the program if the rate balloons to 40 percent in a single year. The sanctions don’t take effect until results are released in 2014.

There it is again: a mega-government which gives amply with one hand, and yet with the other skews the incentives in the system to represent reality as far better than it truly is. One way to underwhelm reality and to soothe the blow of the true extent of the popped student loan bubble was using a shorter data cohort.

Some for-profit colleges encourage students to defer
payments in their early years, in an effort to keep down default rates that could jeopardize their federal funding, according to a report by the Senate Committee on Health, Education, Labor and Pensions released in July.

The report accused for-profits of using the tactic to manipulate their default rates. It singled out the role of SLM Corp. (SLM), the largest U.S. student-loan company commonly known as Sallie Mae. A subsidiary, General Revenue Corp. counsels for- profit colleges on keeping down default rates. University of Phoenix, owned by Apollo Group Inc. (APOL), is a customer, according to the Congressional report

Whether or not the reason for the government to demand more accurate data was to scapegoat the private sector yet again, what it did instead if expose just how deep the student loan hole already is. Because now that we know the revised default data, we can put it together with the recently revised as of a month ago revised total student loan notional number. Recall from the Fed:

The revisions to the data are fairly substantial: as of our August report, 2011Q2 student loan balances were reported at $550 billion. We now estimate that student loans outstanding in that quarter (2011Q2) amounted to $845 billion, $290 billion or 53.7% higher than we reported earlier. These previously excluded loans were also missing from the total debt outstanding; as a result, our estimate of total debt outstanding in 2011Q2 is also revised upward by $290 billion (2.5%).

One can see why everyone in the Federal administration has been so reticent about disclosing the true state of the Federally-funded student loan bubble. Because if one simply assumes the rising default rate has kept constant across all recent cohorts since the updated 2009 number, it would mean broadly speaking, that of the $914 billion in Federal Student Loans at least 13.4% will end up in default. Over $120 billion.

Of course all else is never equal: Federally funded student loans are now increasing at a rate of over $60 billion per quarter. This means that in just about 18 months, the total size of the Federal student loan market will hit $1.3 trillion. Why is that number important? Because that is how big the subprime market was at its peak in late 2007, when everything went to hell and the last credit bubble popped. From Responsible Lending:

As can be seen on the table above, 20% of all subprime mortgages was then expected to default (the ultimate number ended up being far higher). Note that as mentioned above, already over 22% of for-profit student loans are in default.

In other words, the Federal student loan bubble has not only popped, but has all the carbon copy makings of the next subprime crisis. Only when it pops it won't be New Century and Countrywide Financial on the hook: it will be all of America's taxpayers. Remember: these are Federal loans.

And the biggest problem: unlike housing where there is always at least some recovery of collateral, as the house remains, with student debt there is no recoverable asset as the asset is a human being. Granted said human effectively becomes a debt slave courtesy of the non-discharge nature of the student loan, which can not be wiped out even with a personal bankruptcy, but assuming the taxpayer can recover any money using discounted garnished wage flows of what are effectively perpetual(ly discouraged) debt slaves of the system, is simply idiotic.

We give Bernanke at most 2 years before everyone is aware of the true extent of not only the student debt bubble, but that it has already popped, at which point student loans will be the next "asset" to be monetized by the Federal Reserve.

Bite your tongue! The financial system and The Govenment is a magnificent criminal enterprise. They're the most efficient purveyors of fraud, murder, and theft this world has ever seen. They are a glimmering beacon of evil. They are the ultimate bastion of........well, you get the idea

The edumacated debt slaves perhaps should have read the Constitution better- as neither slavery nor involuntary servitude is outlawed under the 13th ammendment. It only takes an act of Congress to the modify federal sentencing guidelines and the debt slaves can actually legally be monetized as indentured servants (or property) of their creditor(s). Thank you Joe Biden, personal bitch of the BofA board, for rewriting the rules so that Student Loan debt cannot be discharged through bankruptcy. Too bad all those edumacated debt slaves probably bought your BS about increasing consumer protection. Thank God I paid for my college out of my own savings.

13th Ammendment

Section 1. Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.

Section 2. Congress shall have power to enforce this article by appropriate legislation

The for profit prison corporations are now demanding minimum occupancy levels in their contracts with the state. It will be up to law enforcement to keep the prisons full, or the kick backs will stop flowing.

Our local Tea Party representative is actually a big-money corporate shill. He sponsored legislation to allow telemarketers and others to call your cell phone, even when you are billed for their calls. The financial industry heavily supports this iniative.

When you're in default, you cannot get 'official' copies of your degree or transcripts, so they effectively do 'rescind' your degree depending on whether or not you're applying for a job that wants the official documents. Trust me...I know....

They also take your tax returns eventually, but I think it happens after like 3 or 4 years of being in default. If you're smart, you call the gubmint around the middle of December or January and tell them you want to pay your defaulted debt; you get on a cheap-as-possible payment plan; you make a couple of payments to get back in semi-good standing, then you get your tax return, and then stop paying again. Trust me....I know...

I'd honestly love to just pay those fucking loans off and get on with my life, but it's kinda difficult when you're living paycheck to paycheck even WITHOUT forking out several hundred dollars a month for the loan payments.

given that it's been generally agreed here that degrees are worth-less pieces of paper, why rescind?

the "you didn't earn that" line - sure, degrees are purchased with student loans, but there are some people who have put in the time & effort to earn their degree, but cannot use them in employment because of the state of the world economy - why continue to stomp on them?

as for "attach the wages" - no wages, no attachments - voila! and from what I've read, a defaulted student loan means no "social security" bennies. . .cue hollow laughter. . .

The USA is a banana subprime-rate republic with financial and security/military oligarchy in charge.

Now, America is a "subprime land" where it doesn’t pay to be honest or work hard. The best way to make a good living is to steal from taxpayers and/or the government. The US financial oligarchy and government employees are really good on it. The only question to ask: how long will Chinese subsidize and pay for it?

For the last 10 years, America has used its military might to threaten, intimidate, and invade other countries to support its unsustainable level of living but, as Iraq, Afghanistan, Syrian, and Iran have shown, this is coming to the end. US military is not that mighty any more. It is just a matter of time when America will have a direct confrontation with a strong adversary following a major American retreat from all over world.

Optimistic to expect Bennie to still be alive in 2045?? With the obvious love for him and his "friends" awash through ZH (and other sites too don't you know!) I was rather expecting him (and others) to be acting as lamp-post decorations within no longer than the next decade!

No wonder senators Hagan & Corker have been working so hard (on behalf of their handlers) to pass the covered bond bill, allowing, among other things for student loan debt to be rolled into marketable securities guaranteed by the FDIC. So far the FDIC has not played along. Write garbage loans then stuff the losers into somebody's pension fund.

Bonds are nice, but student loans should be 0% coming directly from the Fed/Treasury for math and science course tuition with international end demand. Some 2-yr technical degrees, like CNC machine training, should be covered. Degrees with low market demand and room and board expenses should not be backed by government funding.

Big banks and now five administrative middlemen with political connections (Aspire, etc) are too involved in writing the legislation. That makes the program a subprime bubble.

The vast majority of pizzas posting here have never produced anything or had a job producing anything.

And they never will.

All those hypocrites who read Rand and consider themselves candidates for Galt's utopia, would actually be shat upon by Rand herself.

The problem I have with your parasite statement is those who game the system understand it better than those who complain about the system being gamed. I consider it jealousy on the part of those lacking the wit to capitalize on a flawed system and deriding others for doing so.

Really you are either a victim or you aren't. Victims have a mentality where they choose to blame others for their own flaws. They see everyone from Jews to unwed mothers as the source of all their ills.

It's always simpler to blame others than to take charge of your own life. Then you can never claim to your failures because it always is the fault of the other guy.

This is why you are always one step ahead of me. I had flasher and small penis and I could not throw it all in there together like you did. It does still leave the confusion of why the small penis exhibitionist would choose park ave....

not really a step ahead, just had absolutely nothing to throw out there except for an inane thought....my little kids are still running wild at this hour...not good.........i need another pumpkin ale.................

"And the crowd wondered why their favorite pizza at Sam’s Club increased 10% in price this week."

I haven't noticed that, but I did see that Sam's dropped the rotisserie chicken back down to $4.98 (same as Costco's price) from $5.99. Fifty pound bag of rice $18., 50 pounds of popcorn $21. now's the time to stock up.

Jeez, you would struggle to get 50Ibs of rice in the UK for $18, these days! I managed 25kgs (55Ibs, give or take) in LIDL a few weeks ago for £13.99 ($22.65) but that's as close as I've managed recently.

Yes, indeed. Just a few tips from my own experience. Old freezers and clean 50 gallon drums make excellent storage units but tend to become damp over time. Place a small 4 watt lightfixture at the bottom,allowing some space for air circulation. Just leave the drum/freezer open a crack and that will prevent any mould and spoilage. I,m pulling for us, we,re all in this together except for politicians, employees of the Fed,Banksters and other half-wit degenerates who have anything to do with Gubberment.

All my grain gets stored in five gal. buckets, with sealed mylar bags using the dry ice oxygen replacement method prior to sealing. We are now eating rice that was stored this way four years ago, no bugs, no taste difference.

Also forgot to mention during my digging over her disappearance, that there's a chain of connections that heavily implied this is the blogger formerly known as marla's current (though seldom active) blog: http://www.finemrespice.com/

I'm going through some of the old radio zero posts in the archive -- one of the shoutcast links is still active and remnants of a playlist of long ago on it, if I find something complete I'll post links.

when you consider that employers are now routinely running credit checks as part of the employment screening process, that will put those who got educated in "truly" socialist countries (not the faux socialism so many here take such pride in railing against) will be at an advantage since they will not be burdened with non-dischargeable six digit debt.

Wait. I'm confused. I thought from reading many posts here that people who are on their own to educate themselves beyond high school and who are forced to borrow money from bankers to support a consumer driven economy of debt slavery is socialist. Are you saying that there are countries where the people pool their resources and send people to school so the students have no debt? What is that -- capitalism?

While I agree what we have here is neither capitalism or socialism I disagree with your description of socialism. It's not people pulling their money together, that suggests free will to do so, it is another person taking money from one group of people and giving it to another. A concept completely opposite of freedom.

It always amazes me that otherwise intelligent seeming people cannot understand that human beings must co-exist with each other. Lions and Zebras live in a world of true freedom where the strong survive, and the weak are dinner or starve. Humans have the ability to form societies and work together. Some humans don't like that concept because they consider themselves exceptional and they believe they will do better on their own. Other humans are exceptional. The most successful society in the history of our planet -- modern Western civilization -- is founded on the concept that we are not all equal (notwithstanding the preamble, we all know that some people are smarter and/or more motivated than others, and those people win in our society), but we all deserve an equal chance anyway and we all have equal value and we all deserve to eat even if we don't have the ability to feed ourselves. Why? Because no one needs to suffer. No one needs to starve. That is success as a species. You wish to return to the jungle. You believe you are exceptional because you've done well in a society that you seek to dismantle because you want more for yourself, when you already have more than you could ever need. Funny.

The Lions took over because a bunch of Zebras said, "Here, Lions, we want you to have a lot of power, so that you can protect us from other Lions, and oh by the way, please don't abuse this power that we've given you, pretty please, okay? Thanks."

No, its more like the fat lazy lions want to lay around and do nothing, while the other lions do all the work. Then they want in on the feast.

You make it sound as if the reason most people don't have a job is bad luck. Most people live in shitty situations because of the shitty choices they have made in life. They were handed equal opportunity, and they decided to throw it away.

You make it sound as if the reason most people don't have a job is bad luck.

maybe not "bad luck" but the reality of the amrkn ponzi-economy? you and your currently 16 upvotes that believe it's the "individual's fault" there are hundreds chasing after each reasonable paying job on offer, with corporations doing drug & credit checks for possible job-winners - may want to reel in the rhetoric before things get much worse.

They were handed equal opportunity, and they decided to throw it away.

Let me explain why I disagree. I hope you'll excuse me because I've had a little wine tonight. The problem I have with socialism is that a person can not be free. If something is taken from me then you are taking freedom. But if I choose to give something it's because I have free will and I can see the benefits for society. The other problem I have is dependency. I don't mind a temporary safety net... Shit happens and I understand that. But what I do mind is a system where people are propped up indefinitely. I don't feel that's good for society and I especially don't feel it's good for the individual as a person. While I agree a person should and deserves to have an equal opportunity anything beyond that I feel is not the best path because if we say to one group" well you can't do it on your own so we are going to give you a little extra push above everybody else" then you have a system where the most qualified person doesn't get the position. And if we aren't utilizing the most qualified then we aren't going to get the best results.
I hope I'm clear... I probably should have eaten something before having a glass of wine :->

You aren't even slurring, and you are making sense. Like you always do. The social safety net has become a hammock for many. There is never an effort to kick the undeserving off the system when it runs short of money, the answer is to always just raise taxes on the people who work and are responsible. Think of all the billions that are wasted by our government and there is never any effort whatsoever to eliminate it. How many educations would the government waste fund?

Thank you I appreciate the compliment. The thing that I don't think socialists get is that for us limited government people it's not about greed. It's about what we feel benefits society the most and what is the best allocation of capital. But most importantly of all , it's about what promotes a free society. Dependency, in my view is certainly not freedom, you are beholden to the government. Neither is confiscation freedom, because then you not only have to provide for your family but you have to provide for another. So what happens is, eventually there is not enough income earned and the family may require a second income. This becomes destructive to the family, and therefore destructive to society.

"But what I do mind is a system where people are propped up indefinitely."

Wine is good. I'm drinking some too. I agree with many of your points, including that we should cut off the helping hand once we educate and give equal opportunity to succeed, which does not include giving less opportunity to others.

My issue is that socialism by definition includes giving free education and opportunity to those who want to take advantage of it, and I think that's a good thing.

We have to come to grips with what crony, government partnered capitalism does to the world. There’s no end to the brutality of the partnership between corporations and governments. And no end in the amount of devastation they have reaped upon the world in order to boost balance sheets.

The majority of the world’s population is living in squalor thanks to this thieving, extractive government partnership. The destructive score sheet tallies the amount of human beings, communities and resources that have been destroyed. What we have to understand is that there’s no way to control this power or partnership. At the point we are now, it’s self propagating.

That, and clueless. Education actually used to be cheap and of higher quality, that changed the moment government decided to interfere with it. So instead of capitalism, we have socialism now, making education worse and far more expensive than it needs to be. This is not even a point of discussion but perfectly demonstrable.

It's funny how everything you see wrong in this world is precisely the result of what you see as the solution. I have to assume it's some malfunction in the brain that inhibits you to make the required connection. Or maybe it's just the public school system?

And with employers running credit checks on job applicants . . . these students are double "f"ed. Student loan defaults will increase, but the debt is never forgiven. So much young talent unable to climb above the debt they incurred trying to build a future following the axiom implored on education education. A sad day in America. The Fed can buy all the Sallie Maes but it won't fix the problem.

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That is easier said then done, many employers today seek candidates with at least an AA for entry level jobs. Some cases I've seen help wanted ads for entry level bookkeeping positions that require a four year accounting degree. These are not CPA positions, they are entry level bookkeeping positions. I realize this is a heavily regulated industry, but in all reality it does not take a rocket scientist to differentiate between an asset and liability. I'm not disagreeing with you necessarily, but the reality is in many cases without some sort of college education many will not even be considered for an interview.

You already are for a portion of them and they want you to pay even more.

Obama Student Loan Forgiveness

About Obama Student Loan ForgivenessEarlier in his presidency, President Obama announced a student loan forgiveness plan one that has become known as the Obama student loan forgiveness program- for students who were unable to complete their student loan payments or had already completed a significant part of their payments for a long period of time. The Obama student loan forgiveness program automatically clears the remaining debt of anyone who has made regular payments on their federal student loans for a minimum of twenty years. People in military service or who are working in other government departments might have their debts cleared even earlier than that as per Obama Student Loan Forgiveness.

Now it's clear why the "middleman" was eliminated and the gov't took on the debt burden. The financial institutions would have otherwise been saddled with these defaults. Gov't "guarantee" or not. The ostensible reason was to lower the costs to students by lowering the rates. Uh-huh. It was to unload the loans onto the gov't. See? Things make sense if given time to ferment in the mind.

since Obama took office in January 2009, wealthy Americans have continued to pull away from the rest of society. In the aftermath of the recession, income inequality in the U.S. reached a new high in 2011, Census Bureau data show.

Even as the president has decried the hollowing out of the middle class, the fortunes of labor and capital have diverged on his watch. Quarterly corporate profits of $1.9 trillion have almost doubled since the end of 2008, while workers’ inflation- adjusted average hourly earnings have declined.

“At the very high end, people got a whole lot wealthier whereas income stagnated at other levels,” said Anne Mathias, director of Washington research for Guggenheim Securities LLC. “Fifty years ago, people talked about the other half, how the other half lived, and now we’re talking about the other 1 percent.”

These kids are going to suffer. Their parents are going to suffer.There will be a point where parents will not allow the kids to take out loans and waste 50k a year on college. Kids will go to trade schools, community colleges or right into the family business if there is one. College costs will implode in the next ten years.

nmewn I can tell you that where I am, no one tries to tell them (or very few). They still get pushed into these debts by people thinking they are doing them a favor. People like me get my voice drowned out.

Same here. I have screaming for years about this (and other subject so obvious to folks around here).

Society at large is brainwashed. When it comes to education, people are played for their fears that their children will not "live the American Dream." So, they readily cash out thier retirement funds and sign on the dotted line for more.

They know the system is broken - but won't admit it. And nothing you and I can do will get them to "think critically." They are petrified for thier children. And society self-reinforces the whole thing. Some day, these parents and kids are going to look back at what happened - and they are going to be pissed off like never before. This bubble has the potential to be a real show stopper. I have wagered before that it very well might be the last debt bubble that folks willingly walk into.

In the US, military service is indentured servitude (albeit a usually voluntary practice).

The very first piece of paper you sign in the term of indenture.

And once you are an indentured servant of the State, the very next peice of paper you sign is the surrender of all the protections, priveledges, immunities, and rights afforded to US Citizens (and all other human beings) under the US Constitution...

However, given the preponderance of the fat, lazy, uneducated (w/ or w/o papers to the contrary), and unskilled among the populace, perhaps more should give it a try...

I tried to get my kids into a trade school in order to develop a skill set now and pursue college once they have been around the block at least once. Unfortunately they refuse to listen and will choose instead to do the same shit everyone else does.

Already at that point with mine. 2 of 3 are out with degrees and zero debt. The youngest still in college knows there will be no loans, and no funding from me if he 1) gets bad grades, or 2) majors in a useless degree. Why parents support bad grades and useless degrees is hard to understand.

The notion that everyone deserves a higher education is foolish. It's a big lie, colleges are turning out waves of indebted unemployable grads into an abysmal economy with no prospect of a real career.

America has stopped being a democratic republic, and instead become a fasicst plutocracy. Therefore, citizens are NOT wanted! Only bullshit consumers are wanted. Every citizen deserves an education, in order to be a citizen. However, after the powers of government have already been 99% privatized, then citizens have no more role to play. This became a vicious spiral. The triumph of lies and violence destroying the American repulblic has been picking up speed at an expontially accelerating rate. Therefore, the primary role of Americans, to be citizens, has atrophied down to almost nothing! That is the primary way that everthing was driven to get even worse, while freedom and democracy transformed into debt slavery, providing a fake education, which fits inside what is now a totally fake democracy, run by an out of control fiat Emperor.